How do I decide whether to register for VAT?

VAT is known as an indirect tax. This means that it is levied according to how much you spend rather than how much you earn.

VAT registered businesses don’t actually ‘suffer’ VAT. However, they do effectively act as unpaid tax collectors. They must charge 20% output VAT on top of their standard rated sales. This must then be paid over to Her Majesty’s Revenue and Customs (HMRC), usually by submitting a quarterly VAT return.

From the amount paid over, the business can deduct 20% input tax on goods or services that they have bought in. To put it another way, they claim back any VAT that they have spent. The party who eventually suffers the VAT is the end consumer. Normally, this is either a non-VAT registered business or a private individual, who cannot claim back any input tax.

In the UK, there are other rates of VAT such as 0% or 5%.Some transactions are exempt or outside the charge, however, the majority of businesses have transactions which are VATable at 20% and these are known as ‘standard rated’.

What’s best for my business?

There are two major points to consider when deciding whether your business should be registered for VAT:

• Firstly, you should avoid any penalties (and interest) for failing to register when you have passed the registration threshold (currently £85,000)
• Secondly, if operating below the threshold, could it actually be an advantage to register voluntarily?

What are the rules?

The requirement to register for VAT is where your standard rated business turnover exceeds the registration threshold, which is currently £85,000 per annum.

Misunderstanding the rules and failing to take professional advice can be expensive. In a 2019 tax case, a trader failed in his appeal to have a £30,000 penalty overturned. It was held that he had ignored the advice of his accountant and failed to notify HMRC of the need to register for VAT.

A reason for a business failing to register, might be due to a lack of proper records. Another reason could be the failure to understand that turnover for VAT registration is a rolling cumulative threshold. This means that at any point in time you should look back 12 months to see if your cumulative turnover for that previous 12-month period has exceeded the threshold. This applies whether you are self-employed or operating through a limited company. Businesses have suffered penalties for failing to register because they thought that the threshold related to a set accounting period. In other words, they haven’t realised that the cumulative total is not ‘zero-ed’ at the start of each business year.

A further requirement that you must consider is whether your turnover will pass the threshold in the next 30 days.

How do I avoid being caught out?

To avoid penalties and interest – make sure you have good accounting records and keep them up to date. Also, if you intend to make a go of your business, it is a false economy to fail to instruct a good accountant. You will benefit in many ways from having professional advice, and this relates to all business taxes, not just VAT.

Cloud based accounting software such as Xero is easy to use to produce your sales invoices and record your costs. And being ‘cloud based’, you and your accountant can access it online or via a mobile app from any location. Your accountant can then give you the support your business needs to keep your records updated and monitor your turnover.

Since the introduction of Making Tax Digital for VAT, it is necessary to have MTD-compliant software to submit VAT returns. If you use Xero or another cloud-based system, your business is already prepared  should you need to register for VAT.

What about Voluntary Registration?

VAT is the only business tax where you have any choice over whether you charge and pay over a tax. Businesses trading below the VAT threshold may register for VAT voluntarily. The business must then complete and submit VAT returns and either pay over or be refunded for VAT.

If your business is new, or your turnover is below the VAT threshold, you should consider the advantages of registering voluntarily. Do the advantages outweigh any disadvantage? This, of course, will depend upon individual circumstances. For example, the type of goods and services you provide, the sector you are trading in and your plans for your business.

Disadvantages of registering for VAT

A perceived disadvantage is the requirement to keep more detailed records and produce VAT invoices. However, keeping good records will keep you regularly informed as to your turnover and profit. But more importantly, it will protect your business should you be investigated by HMRC.

The main disadvantage of registering for VAT is that you could potentially give your business rivals a competitive edge. If, for example, you sell mainly to non-VAT registered individuals or businesses, then they will be unable to reclaim the VAT. So, by registering for VAT, if your supplies are standard rated, you will have increased the price of your products or services by 20%. If your competitors are not VAT registered, then you will have given them an advantage.

Advantages of registering for VAT

1. Keep up-to-date and informed

Start as you mean to go on and keep good, up-to-date records. Any additional regulations for VAT Registered businesses can then be managed through cloud-based accounting. Accounting software is easy to use, and once a template is correctly set up for your sales invoicing, producing VAT invoices is simple. Compared to using spreadsheets, accounting software saves time, makes credit control easier and is less likely to result in errors.

You can use management reports to keep you informed and to help you grow. As well as knowing your turnover, if you want to grow your business you can use the management reports available through your accounting software to track your business results. A good accountant can help you understand your numbers and trends over time. For example, you may want to examine the results of a sales drive. Or perhaps you may want to keep track of the costs of different marketing methods.

2. Claim back the VAT spent

A business can claim back the input tax on assets from day one. Starting a new business can be expensive and may incur heavy costs. So being able to reclaim the input VAT will reduce these costs by 20% and can help with cash flow. Assets such as commercial vehicles, computers and telephone systems carry VAT which can be reclaimed if you are VAT registered.  However, it is still possible to reclaim some input VAT if you register at a later date. The time limit for goods and assets that you still have when you register is four years.  There is a shorter time limit of 6 months for services.

If your business sells zero-rated goods, such as food, books, newspapers or children’s clothing, then registering for VAT is cost-effective. It means you can claim back the VAT on goods and services bought in, without adding 20% VAT to your sales. You will have to keep all the records for VAT purposes and submit VAT returns. However, you are likely to be able to claim regular refunds from HMRC, rather than pay over VAT.

3. Be perceived as a larger business

If you are selling to VAT-registered businesses, being registered for VAT means you will be perceived as a larger business. If your customers are VAT registered, you will not lose any competitive advantage as they can reclaim the VAT you charge. Once registered, your VAT number appears on your invoices and quotes. This means that you are likely to be perceived as having a bigger and more successful business. Many companies and organisations also prefer to deal with other VAT-registered businesses as they are more likely to be well organised and keep good records.

4. Don’t get caught out

If you are VAT aware, you will not get caught out by suddenly exceeding the limit. If a business is usually operating close to the VAT threshold, it is easy to suddenly exceed the limit. As well as risking penalties from HMRC, you risk misquoting for work and losing the profit you anticipated earning. This is because HMRC would take your sales as having included VAT. So you would have to pay this over rather than keep it as profit. Having to risk asking your customers for the VAT on top of your original quote would be embarrassing at best. If you operate for some time over the threshold without realising, it could be very expensive to rectify and financially crippling for an otherwise good business.

Always get good advice

There are over four million businesses in the UK and the majority are not VAT registered. The Government is aware that many business owners actually manage their turnover to stay below the VAT threshold. Currently the VAT threshold is £85,000 but it is always under review. There is always the possibility that it could be reduced in the future to collect further taxes from businesses. Severely reducing the limit at which businesses must register could bring an additional £2bn or more in tax.

At Vital Statistics we will sit down with you and discuss your plans for your business. We look at your individual circumstances and the sector in which your business operates. This allows us to give you tailored advice to help you decide if and when to register for VAT. To discuss how we can help, call us on 01403 753554 or email [email protected].